(Bloomberg) -- Investors yanked money from municipal bond funds at the fastest clip in more than a year as they sold assets to pay income taxes and tried to protect returns amid signals that the Federal Reserve will keep rates higher for longer.

Municipal bond funds saw an outflow of $1.5 billion during the week ended Wednesday, according to LSEG Lipper Global Fund Flows data, the largest retreat since December 2022. The exodus broke eight consecutive weeks of inflows, spurring debate about whether this week would start an outflow cycle. 

Tax season is one reason for the selling given investors often dump tax-exempt municipal holdings to pay what they owe around the April 15 filing deadline, said Kathleen McNamara, senior municipal strategist at UBS Global Wealth Management. The other factor is volatile and rising Treasury yields that have pushed “skittish” retail investors to the sidelines, she said.

READ: Fed Resets Clock on Cuts and Questions If Rates Are High Enough

“There is some protective selling going on,” said Vikram Rai, head of municipal markets strategy at Wells Fargo & Co. Investors are worried about the Fed not cutting rates, sticky inflation and global tensions, he said. 

Yields on 10-year US government securities have risen over the last several months as the market adjusts to later-than-expected interest-rate cuts.

The 10-year Treasury has risen nearly 40 basis points in April alone and close to 75 basis points year-to-date due to a string of strong economic data and “somewhat disappointing” inflation reports, said John Miller, head and chief investment officer of the high-yield muni credit team at First Eagle Investments. Muni net asset values have dipped this month and “there is some concern that the Fed might not cut rates at all this year.”

“Combine that with the liquidity drain of tax time, and I think that accounts for the recent outflows,” Miller said.

Wells Fargo’s Rai said he’ll wait to see the flow figures over the next three or four weeks before drawing conclusions about whether the latest data is a trend.

Municipal fund flows tend to track the Treasury market and sharp moves can drive “sizable and prolonged” outflows, according to a Barclays Plc report on Friday. “Hence this week’s fund outflows is unlikely to be a one-off, especially if rates continue selling off,” strategists led by Mikhail Foux said in the report. 

Strategists at BofA Securities Inc. said they see buying opportunities on the horizon. 

“Bearish sentiment in the market is getting excessive as extreme scenarios regarding inflation and the possible Fed posture are being debated in the market,” the strategists wrote in a report Friday. “Market entries are around the corner. Investors should prepare to step in in the near term.”

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